Recipe for Success: Pernod Ricard

Pernod Ricard wants to be No. 1 in global wine and spirits, and it’s spent the last decade gathering the ingredients to get there.

Martin Riley, Chief Marketing Officer of Pernod Ricard, talks to ?What If! co-founder Dave Allan and editorial director Andy Comer about where the company’s been, where it’s heading, and the evolving role innovation is playing in getting ideas to market. Edited excerpts:

Andy Comer: Let's talk about Pernod Ricard’s innovation journey and its place in the landscape of today’s spirits industry.

Martin Riley: Pernod Ricard has undergone a massive shift in the last 10 years, transforming itself from a regional drinks business into one of the two leading spirits businesses in the world. The driving forces of this change have been smart acquisition and powerful marketing across the globe.

The first major acquisition was Seagrams, which brought in big, international brands like Chivas Regal and Martell. These were brands of a scale that Pernod Ricard had not managed before. We had been focused in Europe, with big, local brands. The only brand Pernod Ricard owned before 2002 that was being developed in multiple markets beyond Europe was Jameson, which was by no means as international then as it is today.

Our goal then became to develop an international portfolio of major brands which lead to the acquisition of Allied Domecq: Ballantine’s scotch, Beefeater gin, Malibu and Mumm champagne and three years later, Absolut Vodka. In parallel we have built an incredibly powerful business based around about 70 national and regional operating businesses that market and sell our brands across the world.

That’s been the last 10 years. What’s next? The good news is we now have an exceptional portfolio of global brands and a business infrastructure that gives us a platform for growth and innovation. We have said we’re not going to acquire for at least another 12 to 18 months because we’re paying down debts on these acquisitions. So beyond geographic growth, we are now looking for innovation to play a much more significant role in our developing story.

This fits well with our ambition to be leaders of the global wine and spirit market. We’re number two. We’re not far from being number one, but we know if you’re going to get to number one, you have to behave as leaders. And what leaders do is bring new things to market.

Dave Allan: What this reflects is an organization that has begun to think carefully about the role innovation needs to play. This is not a one-off initiative. It’s about creating clear alignment between business strategy and innovation strategy, with buy in and support from the top of the business.

However, the challenge then is to do it in a way that fits the culture of the business. This is not a business where big, centrally driven programs are going to work. There’s a big sense of, We want to develop our own way of doing this.

Riley: That’s right. It’s very important we do things our way. We are proud of our business and our success. In the last 10 years, we have tripled the share price of the company. This has been driven by an incredibly strong, performance-driven culture and a real belief in a decentralized model in which the brands and market companies operate independently, taking responsibility for their own approach and performance.

As Dave said, in this world, big, centrally driven programs won’t work. We’ve had to find ways of creating a set of programs and principles that the operating businesses pick up in their own way. This is a delicate balancing act.

Next, we’ve needed to be willing to go back to first principles. Like any large organization, we’ve got our way of doing things—the way we look at opportunities, the way we look at consumers, the way we measure performance. However, these have been created in a very operationally driven culture. We’ve had to say, Are these right for the new challenges we’re setting ourselves? This means having to stop using tools that don’t give us the kind of insights we want just because these are the tools everybody else uses. Let’s start thinking about tools that are appropriate for our ambitions. And let’s start developing our own tools. It’s the same thing with innovation—let’s not just do it because other people are doing it. Let’s recognize what it can bring to the business—the mindset it will bring.

We’ve done a lot of innovation on our brands, but it tends to be incremental. Nothing that’s really breaking open new market areas. And that’s where we’d like to test ourselves.

Comer: How have you begun scoping out the challenge? What were the specific areas you wanted the transformation to cover?

Riley: As we set out to scope the challenge, we realized that there were a series of very different initiatives that required attention. Let me give you a few examples.

One of the big challenges we set ourselves was to shift the mindset within the whole company. Remember, we are very successful and very operationally driven. But as we began this journey, we believed it was important to encourage a more creative mindset—to help people to be more receptive to new ideas, to be more encouraging of new ideas, and to be rewarding of new ideas.

We developed a way of working called “New Ideas at Work.” This was about turning creativity into a productive tool—giving our people practical behaviors and tools that enabled them to deploy a more expansive approach within their day-to-day work. Our aim was not to throw away what had made us successful, but to integrate creativity as a part of this mindset.

The second thing was to look at our core business. We are in the business of wine and spirits. That’s where we have our expertise and where we want to gain leadership. And that’s where our focus is. But let’s go beyond the incremental. Let’s look at things that might take longer to develop. Let’s get people thinking they can stretch—that they can develop concepts and products that will transform the industry. We know from our consumers where they’re moving. We can be there to meet them. And to move from incremental to stretch, we’ve put additional people and resources in place.

The third element was breakthrough. When we look at our industry, there aren’t many breakthrough innovations, and if you go back to products, you’re going back to the ’70s. Malibu was seen as a breakthrough product. Baileys was seen as a breakthrough product. They created new categories. But there have been very few real breakthrough products since. Plus, it’s hard to do this when the focus is this year’s numbers.

So we had to think differently. We created a new, breakthrough innovation group—we call it “B.I.G.”—and it’s at arm’s length to the company. It operates under its own rules. Its mission will be to develop ideas—with people at Pernod Ricard or entrepreneurs from outside—and take them to testing. It’s product, but it could be services as well. We want them to push the time horizon and the limits of financing. This kind of thing may never be financed in the normal structure of our organization, where priorities tend to be shorter term, and money is given to projects that can return an investment more quickly.

Allan: I remember getting the brief from these guys. What impressed me in their thinking was that this wasn’t about, Let’s just develop a few new products. They were thinking more deeply: How do we build an ecosystem within Pernod Ricard that fits our way of doing business? And that’s going to support innovation?

I remember the questions they were asking: What should be the ambition for this company around innovation? How do we create the right cultural mindset around innovation? What different levels of innovation need to be tackled in different ways? There were questions around expertise—enablers of innovation. There were questions around, How do we steer this and integrate it into the companies’ operating processes? And finally: What are the areas we should be playing in, and what are the areas we shouldn’t be playing in?

Pernod Ricard’s moving beyond this thought that innovation is a department in the business. They’re shifting to a place where innovation is seen as fundamental to how the company works. And that it needs to be built into the ecosystem.

Comer: Martin, what does success look like to you? What are your targets?

Riley: Our evolutionary business continues to add significant margin. We want more high-quality evolution—line extensions, special additions. Where do some of these new ideas come from? Often they’re at the edge of existing categories or they’re a combination of two categories. They are pushing upward, like with super-premium vodkas in the States—brands like Grey Goose, and in the case of tequila, Patron. They’ve set up a new segment—a high-priced segment of a market.

Things are happening at the lower end of the scale in the States in a rapid way, too. SkinnyGirl tequila. Pinnacle vodka going from nothing to a million cases very quickly. Pinnacle vodka did it with a whipped cream-flavored vodka. They kept throwing ideas against the wall, and this one took off. We need to be mindful of that less-classic approach. Things like celebrity endorsements to build brands, like Ciroc has done and SkinnyGirl has done.

We’ve incorporated this into the way we do our longer-term planning. We asked the affiliates to have a section on innovation in their plans—a three- to four-year horizon. Show what they plan to do and why, and what benefit it should bring. Not just financial benefit, but overall benefit in terms of reaching new consumers and new segments.

Comer: How do you see Pernod Ricard's leaders being affected by innovation—in their roles and behaviors, for example?

Riley: It’s a major challenge. Pernod has been built on operational excellence. We have leaders who have built fantastic businesses and careers on consistent delivery of success. The notion of failing, of risk taking—the high probability of not getting it right the first time—is therefore a big challenge to a lot of our leaders, who’ve been very successful and have not really failed. Within French culture, the idea of failure is not quite as tolerated as it is in American or British culture. They are taught from an early age, You must succeed. That’s how you build your future and your reputation. So in a predominantly French culture, to talk about, It’s OK to fail—it’s a challenge.

This requires leadership. This is not the sort of debate that can be pushed down to individuals in the companies. It requires our leaders to actively engage. This means taking risks and recognizing that innovation is about failures as much as successes. What will be the real challenge is when we have examples of things that haven’t worked—taking that learning, applying it, moving on. That’s going to be beneficial to the whole organization in everything we do, not just in innovation.

Comer: How important is role modeling this notion that it’s OK to fail?

Riley: Well, as Woody Allen said, “If you're not failing every now and again, it's a sign you're not doing anything very innovative.” But you don’t fail spectacularly. You don’t look at it like a massive product launch. You look at it as an experimentation phase. That’s the way you can encourage people. You might have three or four projects over a period of 12 months. If one does bomb out, and you don’t want to continue, that’s fine. You’ll have others you can learn from.

Allan: Innovation isn’t about throwing out the past. But doing the new stuff can interrupt doing the old stuff. That’s one of the things that emerges on this journey. It’s how you manage that paradox.

Comer: Quickly, because we have to wrap up—Martin, if you had to give one piece of advice to another leader embarking on a similar innovation journey, what would you say?

Riley: You have to understand the culture of your organization and not force people to do things they don’t believe in. You’ve got to make sure they believe this is serious—that it’s going to lead somewhere, that the senior guys are fully onboard.

Allan: I would echo what Martin said. If you look at the iconic companies people enjoy talking about—Facebook, Google, Amazon—the people who run those companies, who own those companies, are still the entrepreneurs. They are people who have grown multi-billion dollar organizations in a very short time. And they have grown those organizations through innovation.

I’ve been lucky enough to meet senior leaders at Apple, at Amazon, at Google, and when you ask a simple question—How much time do you spend on innovation?—you get figures that range between 20 and 50 percent. And what that says is those leaders are giving significant amounts of time to initiatives not yet generating income. And they’re doing it because they believe innovation is fundamental to growth. A promotion may win you the quarter, but innovation will win you the decade.